In-depth look at Government Accountability Office report on Non-Practicing Entities

During the August Congressional recess, the Government Accountability Office (GAO) released its long-awaited study on Non-Practicing Entities (NPEs), required under the America Invents Act (AIA).

The report paints a rather grim picture of the current patent system. It reinforces the call by key leaders in Congress for legislative reforms that address abusive patent litigation as well as action by the Federal Trade Commission (FTC), the courts, and the US PTO.

Among the important disturbing trends the report identified:

Between 2007 and 2011, two-thirds of defendants in patent litigation were sued over software-related patents.

Among the most important factors contributing to patent litigation abuse are the prevalence of unclear and overly broad patents.

Lawsuits involving software-related patents accounted for 89% of the total increase in defendants from 2007-2011.

By "2011 patents related to software made up more than half of all issued patents," meaning the problem and challenges we face today are going to get worse before they get better.

NPEs brought approximately 20% of all the cases studied by GAO between 2007-2011.

They sued four times more defendants in 2011 compared to 2007, and relative to operating companies, tend to sue many more defendants per suit than operating companies.

In many cases brought by NPEs, the real identity of the party behind the lawsuit and who benefits financially is obscured intentionally.

An estimated 39% of suits involving software-related patents were brought against non-technology companies, such as retailers, hotel chains, public transit agencies, and other everyday businesses, a dramatic increase in recent years.

The potential for disproportionately large damage awards remains a key factor in litigation abuse – an issue that was left on the cutting room floor during consideration of AIA.

There has been a fundamental shift from using patents to protect ideas to aggressive strategies for monetizing portfolios (regardless of the innovation embodied in the invention).

Some commentators, primarily from the traditional patent bar which has resisted any changes to current law, suggest that the report "begs the question of whether drafting new legislation is really needed."

But that view is misplaced and in a distinct minority. For those following the GAO work closely, it became clear that consideration of legislative alternatives was unlikely to be a focus of their work. Silence in the report does not equate to calls for non-action.

The GAO did outline steps for the US PTO to take, reflecting its greater comfort in making recommendations to an Executive Branch agency. The report also points to the role of the courts.

Evidence builds for legislative reforms

In this light, the GAO report is the latest evidence that there is not a silver bullet solution. As FTC Chairwoman Ramirez observed earlier this summer, there is a growing consensus that:

Flaws in the patent system are likely fueling much of the real costs associated with PAE activities.

...effective monetization of low quality patents imposes a de facto tax on productive economic activity with little or no offsetting benefit for consumers. High litigation costs add to the problem by allowing PAEs to coerce targets to pay license or settlement fees that are detached from the economic value of the patents at issue. In short, PAEs exploit underlying problems in the patent system to the detriment of innovation and consumers.

The GAO emphasizes the role of patent quality improvements in its report. But even there, the report is far from suggesting that this will solve the basic flaws.

At best, such incremental steps can only help in the future. And with the rising number of software-related patents the challenge will be enormous. Such efforts do little to address the large number of overbroad, unclear patents that exist today. Even the USPTO has acknowledged this with its "Software Qualty Partnership" efforts, which recognize the agency’s assessment that "software-related patents pose unique challenges from both an examination and an enforcement perspective."

Some who are opposed to legislative reforms have jumped on one sentence in the GAO’s conclusion that "the focus on the identity of the litigant—rather than the type of patent—may be misplaced."

This one line is hardly a recommendation of no action, especially since the GAO avoided commenting on legislative alternatives.

In fact, the current landscape of legislative reforms that are under serious consideration have moved beyond this debate. The key areas of focus of the major proposals are litigant agnostic—they seek to address the abusive practices generated by lack of clear pleadings; fixing the Post-Grant review estoppel; and expanding a carefully tailored program that takes the question of the validity of certain covered business methods out of the expensive court process into an administrative proceeding.

Other priority provisions are being crafted to address the specific ways that NPEs game the system without prejudice to a plaintiff litigant’s stature. These include addressing the asymmetric costs associated with suits brought by a NPE, whose current calculation to bring suit is today relatively risk free; reducing discovery abuses; and seeking to protect down stream users from being 'held up' by demand letters that force settlement rather than fighting back.

In my view, the GAO missed a critical point: that the 20% actually represents, as many studies have shown, some of the most egregious litigation abuses. As one observer noted publicly, "[t]he GAO largely punted on the mandate by Congress to determine what the impact of nonpracticing entities has been on the U.S. economy in recent years." Why did they miss this? It’s not entirely clear.

It is worth noting that the GAO acknowledges that a lot of NPE activity occurs outside of the courtroom. (This is a key point raised by FTC Chairwoman Ramirez and other Commissioners as the agency assesses its own roadmap for action.)

In short, it may be ‘only’ 20%, but it is the tip of the iceberg of abusive practices that have been well documented and studied that are unique to the NPE business model and which legislative reforms—and other actions—are necessary to mitigate.

As many others have pointed out, the GAO report provides ample additional evidence that the current litigation abuses are undermining confidence in the patent system and costing job-creating American businesses.

It’s critical we work together to support the on-going efforts by leaders in both the House and the Senate, supported by the White House, to find meaningful measures that turn the tide of abusive patent litigation. The GAO study is the latest evidence that such actions are needed.

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5 Comments

Red Hat generates its revenue not from technologies it owns, but rather from supporting its customer base who use products in the public domain, or in some cases owned by 3rd parties. All Red Hat knows about patents is...they don't have any.

Just because they call it "reform" doesn't mean it is.

"patent reform"...America Invents Act, vers 1.0, 2.0, 3.0...

“This is not a patent reform bill” Senator Maria Cantwell (D-WA) complained, despite other democrats praising the overhaul. “This is a big corporation patent giveaway that tramples on the right of small inventors.”

Senator Cantwell is right. All these bills do is legalize theft. Just because they call it “reform” doesn’t mean it is. The paid puppets of banks, huge multinationals, and China continue to brain wash and bankrupt America.

They should have called these bills the America STOPS Inventing Act or ASIA, because that’s where they’re sending all our jobs.

The patent bill (vers 1, 2, 3, etc) is nothing less than another monumental federal giveaway for banks, huge multinationals, and China and an off shoring job killing nightmare for America. Even the leading patent expert in China has stated the bill will help them steal our inventions. Congress passed it and Obama signed it. Who are they working for??

Patent reform is a fraud on America. Congress and Obama are both to blame. This bill will not do what they claim it will. What it will do is help large multinational corporations maintain their monopolies by robbing and destroying their small entity and startup competitors (so it will do exactly what the large multinationals paid for) and with them the jobs they would have created. They have already damaged the US patent system so that property rights are teetering on lawlessness. This bill will only make it harder and more expensive for small firms to get and enforce their patents. Without patents we cant get funded. In this way large firms are able to play king of the hill and keep their small competitors from reaching the top as they have. Yet small entities create the lion's share of new jobs. According to recent studies by the Kauffman Foundation and economists at the U.S. Census Bureau, “startups aren’t everything when it comes to job growth. They’re the only thing.” Meanwhile, the large multinationals ship more and more jobs overseas. This bill is a wholesale destroyer of US jobs. Those wishing to help fight this bill should contact us as below.

Small entities and inventors have been given far too little voice on this bill when one considers that they rely far more heavily on the patent system than do large firms who can control their markets by their size alone. The smaller the firm, the more they rely on patents -especially startups and individual inventors. Congress and Obama tinkering with patent law while gagging inventors is like a surgeon operating before examining the patient.

Those wishing to help fight big business giveaways and set America on a course for sustainable prosperity, not large corporation lobbied poverty, should contact us as below and join the fight as we are building a network of inventors and other stakeholders to lobby Congress to restore property rights for all patent owners -large and small.

Congress is being pressured to tip the balance in courtroom patent fights more toward the defendants and away from the complainants. While this is an admirable idea it will probably have the opposite effect to what is intended. Patent trolls and patent aggressors (those who want to monetize their patents) use the high cost of litigation as a weapon against their victims. Making the patent laws more complex works in the patent trolls favor by increasing the complexity of a patent lawsuit and therefor increases the cost of litigation.

The best solution to the software patent problem is to abolish software patents. A huge financial burden will be removed from the entire software industry. And yes, there may be a few pockets in the industry where the benefits of software patents exceed the drawbacks but they are relatively so few as to be insignificant.

We need to lobby the U.S. Congress to abolish software patents in their entirety with no loopholes.

Any entity that is not in the process of producing a physical product within 2 yeas of grant of a patent or within 1 year of purchase of a patent needs to lose control of that patent. Such patents need to become public domain after these limited times if the company is not in the process of producing a product that directly involves that patent. This would eliminate most of these NPEs overnight if applied retroactively. Patent litigation by NPEs needs to be illegal, with very long jail sentences and very heavy fines for violators.

On May 10, 2013 the United States Court of Appeals for the Federal Circuit made a landmark ruling in CLS v Alice. The court heard the case en banc and decided in a 5 - 4 - 1 split that a common banking practice did not become patentable by writing it in software.

Now on September 5, 2013, the Federal Circuit affirmed a District court ruling in In Accenture Global Servs., GmbH v. Guidewire Software, Inc that a computer system claim was not patent-eligible when a common insurance industry practice was written into software. The decision cited CLS v Alice as well as the relevant Supreme Court decisions. The vote was 2 -1 with Chief Judge Rader dissenting.

This decision is HUGE for several reasons:

1. For years Chief Judge Rader has consistently ignored Supreme Court precedence and written patent law as broadly as possible. Now for the first time the Court paid more attention to the Supreme Court's opinions than to Judge Rader's.

3. Judge Rader is losing control of the United States Court of Appeals for the Federal Circuit. In choosing the judges to hear In Accenture Global Servs., GmbH v. Guidewire Software, Inc he could not find any other judge who was a lock to rule for Judge Rader's all software is patentable position.

Mark Bohannon | Mark Bohannon is Vice President of Global Public Policy and Government Affairs at Red Hat. Previously, he served as Senior Vice President, Public Policy and General Counsel at the Software & Information Industry Association (SIIA), the principal U.S. trade association for the software and digital content industry. Prior to his work at SIIA, he was a senior official at the U.S. Department of Commerce.

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